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March 28, 2013

Tainted Honey Sticking It to Global Investors, Consumers

Aside from its use in cooking and baking, honey has a certain reputation among those in favor of natural cures and products, being recommended for everything from allergy cures (local honey is said to desensitize people to the pollens in their area that cause hay fever) to wound care. Demand is high in the U.S., with consumption around 400 million pounds per year. Production is well below that; the 2012 crop is estimated at about 150 million pounds. As a result, the U.S. imports a lot of honey.

In February, charges were brought in a case of honey dumping—Chinese honey imported and sold illegally in the U.S.—and more than 3,000 drums of the stuff were seized. Taxation issues aside, some of the honey was found to be contaminated with antibiotics. Chinese honey is commonly adulterated and often contains illegal and even dangerous drugs; it has been banned from sale in Europe. So how did it get here? Via ultra-filtration, which removes the pollen and thus makes it nearly impossible to identify the honey’s country of origin once it’s in a jar on a grocer’s shelf. Honey purists will tell you that if it doesn’t contain pollen, it isn’t even honey.

China isn’t the only Asian country offering adulterated honey; India’s been caught with its hand in the pot, too. Nor is honey the only troublesome Asian product. For the last several years, Asian imports have been fraught with problems. Japan has its own difficulties, with seafood, rice, and vegetables contaminated with radiation post-Fukushima. But by far the largest source is China, where the business environment has been described by nonprofit Food and Water Watch as a “Wild West” that Chinese regulators admit is beyond their control.

Among more prominent incidents over the last decade or so have been defective tire valve stems, recalled in the millions after a fatality from a blowout. Another Chinese tire manufacturer omitted a required safety feature designed to avoid tread separation; those, too, were recalled.

Pet owners were distraught and outraged when dog food was found to be stretched with melamine, causing kidney failure and killing thousands of pets all over the country. Drywall from China used to repair homes devastated by Hurricane Katrina caused its own storm; defective, it emitted gases that not only corroded copper wiring and air conditioning but also caused health problems and made houses unlivable.

Other problem products have included contaminated shipments of the blood thinner heparin, causing 81 fatalities just in the U.S.; toys contaminated with lead or cadmium; toothpaste containing diethylene glycol—more commonly found in antifreeze—and reusable grocery bags containing lead.

Even fruits, vegetables, and seafood are not safe, with cases of the first two exhibiting contamination from pesticides, herbicides and fungicides—many of which have been prohibited from use elsewhere—and the last from agricultural residues, chemicals, illegal antibiotics, and veterinary drugs.

Not all the contaminated products from China are for the export market; milk contaminated with melamine killed six children in China and sickened 300,000 more, and Yum Brands’ Kentucky Fried Chicken outlets in China took a huge hit when the locally supplied chicken they were serving contained antibiotics. Other familiar corporations affected by melamine contamination include Mars, Unilever, Cadbury and Heinz.

Even death sentences in the case of the contaminated milk have not been enough to stem food adulteration. Efforts to control quality in other products have also been unevenly effective. The problem of adulterated foods is so big that China has begun importing products to avoid the rough-and-tumble world that is food regulation at home—although that hasn’t been proof against adulteration, either. In early March, China made a different kind of headline for destroying almost two tons of cake from Ikea, 2.7 tons of chocolate from Nestlé, and cheese from Kraft, for violation of food safety standards.

All this means a hazardous road for investors looking for opportunities. However, such headline-grabbing failures, coupled with the horsemeat scandal in Europe, have also led to greater efforts being made internationally to compel stricter adherence to health and safety standards. Proposed new FDA rules released in January and February, for example, designed to implement the U.S.’s Food Safety Modernization Act—already law since January of 2011—offer ways to cut foodborne illnesses by penalizing companies that import food but fail to ensure its safety. Additional rule releases are to come later this year. The EU is also discussing new standards.

Businesses proactive about adopting higher standards could offer opportunities; so could companies outside China that already have sound reputations and want to establish a presence in China trade.

Other solutions are afoot as well. Japan has turned to technology as an answer to radiation contamination, offering a new twist on an old method by growing hydroponic crops in buildings sealed off from the radiation. The alternative, waiting for perhaps 10 years to be able to use soil that had once grown rice for the imperial family, was unacceptable—and many are pinning their hopes on the new technology.

Perhaps another piece of news is heartening: liability insurance is a growing market in the Asia Pacific region, according to reinsurer Swiss Re. History has shown insurers to be responsible over the years for improvements in everything from building codes to safety procedures. Hence, the presence of a viable liability insurance market could provide both another avenue for investment in a region that has been growing, albeit from a very low penetration point, and also eventual improvement in production standards.

Swiss Re’s Roy Hraiki, Casualty Product Manager, Asia Pacific, said that “penetration of liability insurance is low at closer to 2%–3% of non-life premiums but growing at a solid rate. However, “this low penetration of liability insurance belies the trend of strong growth in liability exposures in Asia based on vibrant economic fundamentals, population growth [especially the burgeoning middle class] and a broadening of liability regimes. Examples are the adoption of stronger consumer protection legislation and the enactment of product liability laws.”

As companies globalize, they are exposed to more liability in other countries, Hraiki said, adding what he termed “U.S.A. long-arm jurisdiction” can bring jurisdiction over foreign defendants by U.S. courts and result in increased exposure to liability claims. Laws at home requiring compulsory coverage can also drive increased need, and thus demand, for coverage. Hraiki said that is already happening.

Despite its dangers, fortunes were made, and lost, in the Old West. In Asia, caution is called for, just as it was then.